A Woman’s Guide to Pension Sharing in Divorce

If you’re a woman, you’re statistically more likely to experience financial and emotional hardship throughout the process of divorce, especially if you are on the brink of retirement. One of the main challenges you may face at the moment is trying to pick your way through pension sharing, knowing that if it goes wrong you could be left short of money in later years.

What is Pension Sharing?

Pension sharing is the process of splitting pension schemes built up during working years. Any one of your ex-partner's personal or work-related pensions can be shared based on a percentage dictated by the financial settlement agreed during the divorce process. Pension sharing effectively awards a partner with a transferable credit for sticking it out in the relationship, creating a way to use funds that would have been available to both parties should the marriage have remained intact.

Considerations for Divorcing Women

If you are considering a pension sharing order, special care should be given to certain aspects of the process. First, pension sharing is based on a percentage of your partner’s pension valuation – not a hard and fast amount. This creates complexity due to the length of time that passes between agreement on that percentage and when the transfer credit takes place. Pension values fluctuate over time, especially when underlying investments are relatively high-risk. If markets take a turn for the worse, you may be left with far less than anticipated.

As an example, let’s say Mary is set to receive 50 per cent of Tom’s personal pension, currently valued at £250,000. Four months pass between the time a pension sharing order is granted and when the transfer credit is implemented, and Tom’s pension valuation has dropped to £170,000. Instead of receiving half the initial valuation, Mary is left with half of the current pension value - a difference of £40,000!

Managing the Time Risk

Remedies that lessen the blow of the moving target of pension valuation are scarce, but you can work quickly when pension sharing orders are in play to ease concerns. Overarching rules provide that pension sharing orders are required to be completed within four months, and pension providers must act swiftly to deliver the transfer credit. Also, asking for a pension valuation near the start of the implementation process is a sound strategy to safeguard yourself from drastically lower valuations.

Additionally, knowing where the pension credit is to be transferred well before the transfer credit is implemented is a critical step. It is rare that you are eligible to take ownership of a transfer credit under the same work or personal pension scheme already in place by your partner. Instead, transfer credits are applied to pensions in your name. If you do not have a pension prior to a pension sharing order being granted, you should work with a professional to create one.

Speed and planning ahead are not the only means to a successful end with pension sharing orders; you have the opportunity to protect yourself from lower valuations and transfer credits by building some flexibility into financial settlement documents. For instance, if other marital assets – cash, property, collectibles etc. – are available, these can be offered up to make up for any delay between the initial valuation and the actual transfer credit.

The Bottom Line

Pension sharing can be a viable method to achieve financial stability long after your divorce is finalised, but only when expectations are realistically set. Be proactive when it comes to obtaining the valuation and determining where the transfer credit will ultimately land, and make sure that you know your options if a shortage surfaces. The financial aspects of divorce are far more manageable when you remember the process of pension sharing requires equal parts time and patience, with a pinch of flexibility thrown in for good measure.